Finance Q14
Finance Q14
Finance Q14
2 points
Question 6
For a portfolio of 40 randomly selected stocks, which of
the following is most likely to be true?
Answer
The riskiness of the portfolio is greater
than the riskiness of each of the stocks if each was held
in isolation.
The riskiness of the portfolio is the
same as the riskiness of each stock if it was held in
isolation.
The beta of the portfolio is less than
the average of the betas of the individual stocks.
The beta of the portfolio is equal to the average of the
betas of the individual stocks.
The beta of the portfolio is larger than the average of the
betas of the individual stocks.
2 points
Question 7
Stock X has a beta of 0.5 and Stock Y has a beta of 1.5.
Which of the following statements must be true,
according to the CAPM?
Answer
If you invest $50,000 in Stock X and $50,000 in Stock Y,
your 2-stock portfolio would have a beta significantly
lower than 1.0, provided the returns on the two stocks are
not perfectly correlated.
Stock Y's realized return during the coming year will be
higher than Stock X's return.
If the expected rate of inflation increases
but the market risk premium is unchanged, the required
returns on the two stocks should increase by the same
amount.
Stock Y's return has a higher standard
that on A.
2 points
Question 12
Assume that the risk-free rate is 5%. Which of the
following statements is CORRECT?
Answer
If a stock has a negative beta, its required return under
the CAPM would be less than 5%.
If a stock's beta doubled, its required return under the
CAPM would also double.
If a stock's beta doubled, its required return under the
CAPM would more than double.
If a stock's beta were 1.0, its required return under the
CAPM would be 5%.
If a stock's beta were less than 1.0, its required return
under the CAPM would be less than 5%.
2 points
Question 13
Stock HB has a beta of 1.5 and Stock LB has a beta of 0.5.
The market is in equilibrium, with required returns
equaling expected returns. Which of the following
statements is CORRECT?
Answer
If expected inflation remains constant but the market risk
premium (rM
rRF) declines, the required return of Stock LB will
decline but the required return of Stock HB will increase.
If both expected inflation and the market risk premium
(rM rRF) increase, the required return on Stock HB will
increase by more than that on Stock LB.
If both expected inflation and the market risk premium
(rM rRF) increase, the required returns of both stocks
will increase by the same amount.
Since the market is in equilibrium, the required
2 points
Question 22
A stock is expected to pay a year-end dividend of $2.00,
i.e., D1 = $2.00. The dividend is expected to decline at a
rate of 5% a year forever (%). If the company is in
equilibrium and its expected and required rate of return is
15%, which of the following statements is CORRECT?
Answer
The companys current stock price is $20.
The companys dividend yield 5 years from now is
expected to be 10%.
The constant growth model cannot be used because the
growth rate is negative.
The companys expected capital gains yield is 5%.
The companys expected stock price at the beginning of
next year is $9.50.
2 points
Question 23
Stocks A and B have the following data. The market risk
premium is 6.0% and the risk-free rate is 6.4%. Assuming
the stock market is efficient and the stocks are in
equilibrium, which of the following statements is
CORRECT?
AB
Beta 1.10 0.90
Constant growth rate 7.00% 7.00%
Answer
Stock A must have a higher stock price than Stock B.
Stock A must have a higher dividend yield than Stock B.
Stock Bs dividend yield equals its expected dividend
growth rate.
Stock B must have the higher required return.
Stock B could have the higher expected return.
2 points
Question 24
The expected return on Natter Corporations stock is 14%.
The stocks dividend is expected to grow at a constant
rate of 8%, and it currently sells for $50 a share. Which of
the following statements is CORRECT?
Answer
The stocks dividend yield is 7%.
The stocks dividend yield is 8%.
The current dividend per share is $4.00.
The stock price is expected to be $54 a share one year
from now.
The stock price is expected to be $57 a share one year
from now.
2 points
Question 25
For a stock to be in equilibrium, that is, for there to be no
long-term pressure for its price to depart from its current
level, then
Answer
the expected future return must be less than the most
recent past realized return.
The past realized return must be equal to the expected
return during the same period.
the required return must equal the realized return in all
periods.
the expected return must be equal to both the required
future return and the past realized return.
the expected future returns must be equal to the required
return.
2 points
Question 26
Two constant growth stocks are in equilibrium, have the
same price, and have the same required rate of return.
Which of the following statements is CORRECT?
Answer
The two stocks must have the same dividend per share.
If one stock has a higher dividend yield, it must also have
a lower dividend growth rate.
If one stock has a higher dividend yield, it must also have
a higher dividend growth rate.
The two stocks must have the same dividend growth rate.
The two stocks must have the same dividend yield.
2 points
Question 27
If a stocks dividend is expected to grow at a constant
rate of 5% a year, which of the following statements is
CORRECT? The stock is in equilibrium.
Answer
The expected return on the stock is 5% a year.
The stocks dividend yield is 5%.
The price of the stock is expected to decline in the future.
The stocks required return must be equal to or less than
5%.
The stocks price one year from now is expected to be 5%
above the current price.
2 points
Question 28
Stocks X and Y have the following data. Assuming the
stock market is efficient and the stocks are in equilibrium,
which of the following statements is CORRECT?
XY
Price $30 $30
Expected growth (constant) 6% 4%
Required return 12% 10%
Answer
Stock X has a higher dividend yield than Stock Y.
Stock Y has a higher dividend yield than Stock X.
One year from now, Stock Xs price is expected to be
Exchange rate risk is the risk that an unexpected change in the exchange
rate will reduce NPV of a project's cash flows.
Exchange rate risk short term this risk can be hedged by using financial
instruments such as foreign currency futures and options.
Exchange rate risk long term Long-term exchange rate risk can best be
minimized by financing the project in whole or in part in the local currency
Political risk A foreign government can block repatriation of profits and even
seize the firm's assets
Risk-adjusted discount rates are rates of return that must be earned on given
projects to compensate the firm's owners adequatelythat is, to maintain or
improve the firm's share price.
the following is a way risk management can be used to increase the value of
a firm? a.Risk management can increase debt capacity.
b. Risk management can help a firm maintain its optimal capital budget.
c. Risk management can reduce the expected costs of financial distress.
d. Risk management can help firms minimize taxes.
In theory, reducing the volatility of its cash flows will always increase a
company's value. false